Sell-side checks yield upgrades

Emulex and Vital Images lifted

By

SusanLerner

NEW YORK (CBS.MW) -- A trio of stocks got upgraded Thursday after the latest checks by analysts unveiled encouraging pictures of what the underlying companies' prospects look like.

Among those finding favor was storage-networking company Emulex Corp.
ELX, -4.29%
upgraded to "outperform" from "sector perform" at RBC Capital Markets based on an accelerating demand picture for the company's key original equipment manufacturer, or OEM, customers.

Montague also boosted his 12-month price target for the stock to $33 from $24.

Montague said this December-quarter strength was typical of the company's historic pattern and suggests Emulex may post upside to the diluted view for this quarter, suggesting that as the pick-up in the tone of business becomes apparent the company's outlook for the current quarter may move to the high end of the sequential growth expectations for the sector.

Typically attributed to seasonal large data-center projects, Montague noted that the year-end strength this year may also be aided by IBM's mainframe upgrade.

"We believe all three of Emulex's key OEM customers, EMC, H-P and IBM, are demonstrating healthy trends but sense very strong IBM activity," said Montague. "In either event, we see clear evidence of order acceleration and build forecast increases that indicate likely follow-through in the quarter."

Yet, given the relatively early surge, Montague said he sees no evidence that this activity is pulling demand forward from the March quarter.

Separately, Emulex said it completed its Vixel Corp.
VIXL, +12.07%
tender offer. Montague noted that he expects management to provide additional information on its business trends once the deal is finalized.

Emulex's shares closed up $1.22, or 4.5 percent, to $28.62.

Vital statistics

Elsewhere, Vital Images rallied $1.38, or 8.5 percent, to $17.65 after its shares
VTAL
were upgraded to "overweight" from "equal weight" at Pacific Growth Equities.

Analyst Kate Sharadin said she made the move ahead of several events that she believes could be positive for the stock, including the December meeting of the Radiological Society of North America.

But she also cited checks that indicated a positive outlook for the company's products. Vital Images makes 3D medical imaging software for use in disease screening, clinical diagnosis and therapy planning.

Among those products are a computer-aided detection solution for computed tomography, or CT, colonography -- also known as virtual colonoscopy.

"We are hearing from many radiologists that the acceptance level of virtual colonoscopy is increasing and we believe VC could be a significant growth driver in 2004," Sharadin wrote in a research note.

Further, Sharadin noted that recent analysis suggests that the outlook for 3D imaging is excellent.

"Recent discussions with the experts tell us that the next iteration of multi-slice CT will put more emphasis on the need for 3D visualization tools," said Sharadin who added that in speaking to surgeons, she came away believing that the 3D market will gain increasing acceptance within the surgical area of the hospital.

"We actually believe that surgery, more so than radiology, could be the driving factor behind the next level of growth of 3D," she said.

More analyst boosts

In other sell-side action, Prudential Equity group upgraded commercial truck manufacturer Paccar Inc.
PCAR, -2.29%
to "overweight" from "underweight," telling clients the recent price decline has given rise to a good entry point into the stock.

"We continue to believe that the company will benefit from a very good North American Class 8 truck demand improvement in 2004 through 2006 and we expect good earnings leverage to the improved demand levels," said analyst Andrew Casey.

He expects that between now and year-end investors will be able to take advantage of two good catalysts for the stock -- improving industry order trends for Class 7 trucks and a special dividend.

Paccar shares ended the day up $2.97, or 3.9 percent, at $78.32.

And LeapFrog
LF
jumped $1.60, or 4.8 percent, to $34.70 on the heels of a Bear Stearns upgrade.

Analyst Jennifer Childe raised her rating on the maker of educational toys to "outperform" from "peer perform," citing the stock's valuation as well as channel checks that continue to suggest the company's products are selling "extremely well" at retail.

"Management has publicly confirmed that all $25 to $26 million of missed third-quarter sales were made up during the first few weeks of the [fourth] quarter, thereby alleviating uncertainty over whether the missed sales were truly a result of poor execution at the company level or retailer reluctance to take on inventory in a more competitive environment," said Childe.

"Although inventory within the channel is nearly impossible to accurately gauge, we are confident that if the company's products continue to sell well at retail, it will have a strong fourth quarter."

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